A Shareholders Agreement is a lengthy legal document, which sets out how your company operates, the responsibilities of the directors and shareholders, how a shareholder can leave, and what happens when a shareholder does leave.
A well-drafted Shareholders Agreement will also set out how different types of leave are dealt with. There are generally 2 different types of leave events – “good leaver events” and “bad leaver events”.
We recommend that you seek legal advice from a contract lawyer for more in-depth advice.
What are good leaver events?
Good leaver events may include any of the following events, which are committed by a shareholder, or a director appointed by a shareholder:
- Ceasing to be a director or employee of the company;
- Becoming incapacitated by illness or injury;
- Being mentally incapable; or
- If the shareholder is a company, an order is made for the company to be deregistered or wound up.
The Shareholders Agreement would then need to indicate what would happen to the shares of a shareholder who commits a good leaver event. Some companies require the shareholder to sell the shares that it holds back to the company or to the other shareholders on a proportional basis.
A method for calculating the purchase price for a share sale triggered by a good leaver event also needs to be included. This can be a set formula agreed upon by the shareholders, which are typically set out in the Shareholders Agreement. Alternatively, the Shareholders Agreement can provide a procedure for an independent valuation of the company. How the purchase price is to be determined is not a legal question but a commercial decision for you to make.
What are bad leaver events?
Bad leaver events may include any of the following events, which are committed by a shareholder or a director appointed by a shareholder:
- Material breach of the Shareholders Agreement;
- Consistently failing to meet his or her duties;
- Being disqualified from managing corporations under the Corporations Act;
- Engaging in conduct which brings the directors, shareholders or the company into disrepute;
- Knowingly acting in a manner which is likely to impair the reputation, value and goodwill of the company; or
- Attempting to dispose of shares other than in accordance with the Shareholders Agreement.
The Shareholders Agreement also needs to set out what happens when a bad leaver event occurs. Will the company buy back the shareholder’s shares? And how much will they pay? This is usually a discounted price from the purchase price that is used to buy back good leaver shares.
Good leaver and bad leaver event clauses are not standard clauses in Shareholders Agreements but they are recommended. It would be unfair to treat shareholders leaving on a good leaver event in the same way as those leaving on a bad leaver event. If you would like extensive good leaver and bad leaver event provisions included in your Shareholders Agreement, you should speak to an experienced contract lawyer to ensure that the provisions are properly drafted.